We are still working through the cash disbursement schemes mentioned in the fraud tree. For a picture of the fraud tree, see this link: http://www.acfe.com/fraud-tree.aspx. Last time we discussed the categories of fraudulent disbursements, we covered payroll schemes and billing schemes. This time we will cover the third out of five schemes classified by the Certified Fraud Examiners as cash disbursement schemes and expense reimbursement schemes.

Go tell that long tongue liar,
Go and tell that midnight rider,
Tell the rambler, the gambler, the back biter,
Tell ‘em that God’s gonna cut ‘em down.
Run on for a long time
You can run, Lord, for a long time.
You can run, Lord, for a long time
But let me tell you God Almighty’s gonna cut you down.Traditional folk song

Expense Reimbursement Schemes

Another way to falsely extract money from your employer is to make up fake or inflated business expenses. Under this section of the tree, the Association of Certified Fraud Examiners lists four components:

Mischaracterized expenses

Overstated expenses

Fictitious expenses

Multiple reimbursements for expenses

Mischaracterized Expenses

When I was in college, I worked as an accounts payable clerk at a high tech company for a summer. One of my jobs was to review travel expense reports for compliance with corporate policy.

The company did not pay for movies in the hotel room – especially not adult movies. Adult movies are more expensive, so I knew that one executive was being – shall we say ‘creative’ – with his entertainment charges. The phone call was a little tense, “Your film is not allowable, sir…”

Robert Half International, a professional recruiting firm, asked 150 senior executives with some of the nation’s largest companies, “What is the most outrageous thing that an employee has tried to pass off as a work-related expense?” It turns out creative employees have tried to expense tropical fish, traffic tickets, the cost of transporting a pet gerbil overseas, ‘lodging’ at a storage facility, expensive silk sheets and silverware, excursions to Europe and the Masters, health care coverage for a pet, and my personal favorite, divorce costs. I can see the reasoning there: employers expect so much nowadays, they probably trigger most divorces in the US.[1]

Overstated Expenses

I enjoyed working with a Medicare audit group in 2008. They were responsible for finding fraud, waste, and abuse in the Medicaid program. That is quite an undertaking since so many people and so many systems are involved, and so many folks are in need. Doctors, hospitals, nurses, pharmacies, suppliers, patients, and families can be mighty creative in getting just that little extra from the federal government by overstating expenses. Here is another executive summary from a GAO audit.

GAO has designated Medicare as a high-risk program since 1990, in part because the program’s size and complexity make it vulnerable to fraud, waste, and abuse. Fraud represents intentional acts of deception with knowledge that the action or representation could result in an inappropriate gain, while abuse represents actions inconsistent with acceptable business or medical practices. Waste, which includes inaccurate payments for services, also occurs in the Medicare program. Fraud, waste, and abuse all can lead to improper payments, overpayments and underpayments that should not have been made or that were made in an incorrect amount. In 2009, the Centers for Medicare & Medicaid Services (CMS) – the agency that administers Medicare – estimated billions of dollars in improper payments in the Medicare program. This statement will focus on challenges facing CMS and selected key strategies that are particularly important to helping prevent fraud, waste, and abuse, and ultimately to reducing improper payments, including challenges that CMS continues to face. It is based on nine GAO products issued from September 2005 through March 2010 using a variety of methodologies, including analysis of claims, review of relevant policies and procedures, stakeholder interviews, and site visits. GAO received updated information from CMS in June 2010.

GAO has identified challenges and strategies in five key areas important in preventing fraud, waste, and abuse, and ultimately to reducing improper payments. GAO has made recommendations in these areas. CMS has made progress in some of these areas, and recent legislation may provide the agency with enhanced authority. However, CMS faces continuing challenges. 1. Strengthening provider enrollment process and standards. Checking the background of providers at the time they apply to become Medicare providers is a crucial step to reduce the risk of enrolling providers intent on defrauding or abusing the program. In particular, GAO has recommended stricter scrutiny of providers identified as particularly vulnerable to improper payments to ensure they are legitimate businesses. 2. Improving pre-payment review of claims. Pre-payment reviews of claims are essential to helping ensure that Medicare pays correctly the first time. GAO has recommended that CMS further enhance its ability to identify improper claims through additional automated pre-payment claim review before they are paid. 3. Focusing post-payment claims review on most vulnerable areas. Post-payment reviews are critical to identifying payment errors and recouping overpayments. GAO has recommended that CMS better target claims for post payment review on the most vulnerable areas. 4. Improving oversight of contractors. Because Medicare is administered by contractors, overseeing their activities to address fraud, waste, and abuse is critical. GAO found that CMS’s oversight of prescription drug plan sponsors’ compliance programs has been limited. However, partly in response to GAO’s recommendation, CMS oversight of these programs is expanding. 5. Developing a robust process for addressing identified vulnerabilities. Having mechanisms in place to resolve vulnerabilities that lead to improper payment is vital to program management, but CMS has not developed a robust process to specifically address these. GAO has recommended that CMS establish an adequate process to ensure prompt resolution of identified improper payment vulnerabilities.

Here in Austin, the directors of an electric co-op, the Pedernales Electric Cooperative (of which I am a member), paid themselves ten times the salary of the nation’s second largest co-op! Board members were reimbursed for about $700,000 in expenses between 2002 and 2006 for everything from first-class airfare to top-tier hotel stays to costly purchases of meals, furniture and concert tickets, according to court records. All of these board members were, thankfully removed in shame, but not before they lived the high life for a good long while.[3]

Fictitious Expenses

Yes, another Medicaid story! The plethora of Medicaid stories shouldn’t be too surprising since over 20% of our federal budget is spent on Medicaid.[4]

The number one crime in Miami isn’t drug trafficking; it is Medicare fraud. A 60 Minutes investigation uncovered hundreds of tiny pharmacies and doctors’ offices in South Florida that weren’t staffed or open; some were really just storage facilities!

One fraudster shared with 60 Minutes how easy it is to set up a fake supplier or pharmacy and bill the feds using names and social security numbers of real patients. Hackers steal the names and social security numbers from legitimate doctors’ offices and pharmacies and sell them for up to $10 a name to these illegitimate ‘suppliers.’ One retired judge’s social security number was used to charge for a prosthetic right and left arm. Only problem is, he still has both arms and they work just fine!

Medicaid auditors are understaffed and overwhelmed. And most scammers are able to operate without any trouble – quietly ripping off $20-40 thousand a day.[5]

An aversion to IT Cost a New Zealand Company $1.7 million!

A simple fraud, using Microsoft Excel templates to create the 350 bogus invoices, lasted six years and made Trevor Uialatea Esera richer by $1,758,193. As the company’s IT manager, he was responsible for signing off expenditures, preparing the IT budget, and ordering equipment and computer software.

He created fake invoices from three companies. Two of the companies – Intergra Images and Software Plus – were bogus, and the third had no idea what he was doing. Court documents described the fake firms as “companies of his own invention.”

Esera’s bosses were oblivious to his fake invoicing because senior staff at Rinnai, a water heater manufacturer, had little or no experience in IT.[6]

Multiple Reimbursements for Expenses

Have you seen the website that lets you create fake receipts? Just Google ‘fake receipts,’ and Google lists pages and pages of sites. One of the sites is generic, but for a small fee you can upgrade to get better logos for well-known companies. Here is an image of what you can create using one of these sites:

Looks pretty good, doesn’t it?

If you think you can get away with it, why not submit the same expense more than once! You’d score extra points for commiting two frauds at once – a fake receipt and double payment on the same receipt. You over-acheiver you!

I receive ridiculous proposals and promises of riches every day via email. “Please let me introduce myself. I am blah blah from X, Africa seeking to transfer funds to the United States. I will share the proceeds with you, blah blah.” A CPA in my class confessed that one of his elderly clients fell for this scam and lost $50,000 because he gave the scammers his bank account number.

I have heard of (but can’t tie down with a news story) scammers creating hundreds of fake invoices and sending them to every corporation they can find. Even if only 2 out of a hundred pay, they still have something with which to buy that coveted wide-screen TV!

I can easily see this happening, because when I worked as an accounts payable clerk the summer of my junior year in college, one of my horribly boring tasks was to match up the vendors’ monthly statements to their invoices. It was hard to reconcile the two because the vendors would call complaining that we weren’t paying them in a timely manner and the accounts payable supervisor would often pay whatever was in front of her… It was a mess. Several times, we decided to pay whatever the came in through the mail because we were getting so backed up. We wrote a check, crossed our fingers and hoped for the best.

[1] Robert Half International. Can You Expense a Tropical Fish? What Workers Try to Put on the Company Dime. September 24, 2009.

In our last chapter, we discussed the fraud tree – a taxonomy of fraud created by the Certified Fraud Examiners. Now we are going to look at another model created by the Certified Fraud Examiners which is also mentioned in the GAO’s Green Book – the fraud triangle.

The GAO’s Green Book calls the three components of the fraud triangle ‘fraud risk factors’:

8.04 Management considers fraud risk factors. Fraud risk factors do not necessarily indicate that fraud exists but are often present when fraud occurs. Fraud risk factors include the following:

Incentive/pressure - Management or other personnel have an incentive or are under pressure, which provides a motive to commit fraud.

Opportunity - Circumstances exist, such as the absence of controls, ineffective controls, or the ability of management to override controls, that provide an opportunity to commit fraud.

Attitude/rationalization - Individuals involved are able to rationalize committing fraud. Some individuals possess an attitude, character, or ethical values that allow them to knowingly and intentionally commit a dishonest act.

I ‘d seen that triangle dozens of times, but never took it seriously until…

The audit profession underwent a significant transformation in the 90’s. Auditors acquiesced to customer expectations and agreed to perform some due diligence procedures regarding fraud. So fraud became the training and discussion topic of the moment, and I must have attended over a dozen seminars and read countless articles and books that contained the fraud triangle. I saw it so often, I started to wonder if it is was any good… kind of like that annoying pop song that you hear 10,000 times each summer. (I swear if I hear “Renegades” one more time, I’m gonna…! Jeep even uses it to sell Renegades on television commercials! I can’t escape that song…ARGH. )

As I wrote that story, I got a sinking feeling that I couldn’t shake. I suspected that one of my client’s was suffering fraud, too. Of course, I lacked confidence in my feeling because, once I started writing that book on fraud, I suspected everyone of fraud, even the guy selling pizza slices at the mall! But when it came to this client, a boutique hotel owner (we’ll call her Jesse), I was actually right.

Jesse, Eowyn and $30,000 in Credit Card Charges

Jesse is very creative and constantly creating super cool venues and experiences for the hip Austin community. She designed her hotel in Austin with artists and musicians in mind. Bob Dylan was known to hang out in Jesse’s hotel and as of late, she and her girlfriend have been hanging out with Robert Plant – you know, the lead singer of Led Zepplin. Soooo cool.

Jesse hired me (unhip and uncool CPA me) to teach her artist-and- musician-employees-turned-business-people how to manage the business’s resources. As part of this effort, I needed to work closely with her bookkeeper, Eowyn.

Eowyn was so hard to work with that I eventually gave up working for Jesse. Another reason I stopped working for Jesse is that she was hard to get a hold of. Jesse was super busy creating other ventures and enjoying her rich social life, and she had left cranky Eowyn in charge.

Eowyn wouldn’t show up for meetings, refused to get me the information I requested, and was aggressive and ornery. When I asked questions, she was evasive and promised that she’d do some research and get back with me. She didn’t get back to me. Several times she set a meeting with me that she didn’t bother to attend.

So once, I surprised her and showed up at her office without an appointment. But instead of giving me what I wanted, she wasted a whole hour telling me all about her sordid personal life. She told me all about her multiple children and multiple lovers and unemployed ex’s which all sounded like they were living with her and her kids. And although I knew that she was making about $15 an hour and was in her late 20’s, she was sending her two kids to one of the most expensive schools in town.

Eowyn was also very cozy with several other female staff members who were also vaguely unhappy. Eowyn and her posse were not close to Jesse and her top managers and often made snarky comments to put down the managers. Eowyn and her posse were quick to support each other and shift blame to others for any problem they themselves caused.

And although Jesse offered several times, Eowyn turned down help with her recordkeeping. Eowyn demurred and said she was fine, but looking back, it was obvious she wanted to control the records herself.

How could I have missed it earlier? Eowyn had every facet of the triangle covered – opportunity, pressure, and justification. Eowyn had the opportunity to steal because Jesse wasn’t watching very closely. She was too busy running her hip and cool empire. Eowyn definitely had pressure, I mean, supporting a crew of underemployed hipsters and children can’t be cheap! And although I couldn’t get in Eowyn’s head to figure out how she justified stealing, she might have said something to herself like, “I’m underpaid and Jesse and these managers don’t appreciate me!”

Once I recognized what was going on, I wrote to Jesse (because I could never get her on the phone) and told her to sit down. I wrote that I suspected Eowyn was stealing from her. She was amazed at my insight because she had just hired an experienced accountant with a background with Marriot hotels who had informed her that Eowyn had taken over $30,000 from Jesse using the hotel’s credit card.

I felt good that I had finally seen it and that I had finally used that suspiciously ubiquitous fraud triangle for a real life situation, but I also felt like a jerk that I had not recognized what Eowyn was up to earlier. I still feel like a jerk because if I’d ‘clicked’ earlier, I could have saved Jesse $30K. There Eowyn sat right in front of me, time after time displaying all of the markers of a fraudster – opportunity, pressure, and lots and lots of attitude, and I didn’t see it!

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